In an incident that received fairly wide industry press coverage, it was recent discovered that Google Documents allowed those viewing a user's shared files to view other documents that were not specifically shared. Details can be found here, among other places. The situation has now apparently been resolved.
The incident did not affect a large percentage of the files stored on Google Documents ("less than 0.5% of all [Google] documents"), but the ultimate impact may end up exceeding the seemingly minor proximate impact.
Google is trying to build a business model based on "cloud computing," i.e. the idea that data and applications do not need to reside on PCs, but that they should be based "in the cloud." There are clearly advantages to cloud computing. As an early adopter and proponent of Gmail, I haven't use a local software mail client for my personal email in years. I can access my data from anywhere that has Internet access and from any web-enabled platform. People, for the most part, believe in cloud computing for email.
Documents, however, are something else. Almost everyone still clings to a local copy of MS Office, Open Office, or some other software-based suite for word processing, spreadsheets, simple databases, and presentations. Google is fighting an uphill battle here to convince people that the advantages of working with documents in the cloud outweigh the risks and disadvantages.
Google still has a lot of goodwill capital in the eyes of the computing masses. People trust Google more than they trust, e.g., Microsoft. If Google said that cloud computing offers real advantages and can be secure, then people are willing to believe it. Now, however, as nearly every blogger that covered this story has pointed out, people will start to question the security of cloud computing in a significant way.
What will the next Google Documents security breach look like? Should I store any sensitive information up there? Maybe I trust Google not to read my documents, but do I trust them to make sure that others don't read them?